Speech to the World Services Group, 6 April 2017

ADDRESS TO THE WORLD SERVICES GROUP

AUCKLAND, 6 APRIL 2017

STEPHEN JACOBI, EXECUTIVE DIRECTOR, NEW ZEALAND INTERNATIONAL BUSINESS FORUM, NEW ZEALAND CHINA COUNCIL

TRADING IN AN UNCERTAIN WORLD – THE POST-TPP TRADE AGENDA FOR NEW ZEALAND AND ASIA

It’s good to be with you today and to have this opportunity to speak about the outlook for trade and investment in the Asia Pacific region.

I’m speaking to you mainly from the perspective of the NZ International Business Forum, a group of senior business leaders concerned with New Zealand’s engagement in the global economy.

But the themes I’m going to talk about are also relevant across the range of my work with organisations including the NZ China Council, the APEC Business Advisory Council and the Australia New Zealand Leadership Forum.

If I had been giving this presentation eighteen months ago, I would have said that the forward agenda was nice and tidy, and would focus largely on how to make the most of the newly-minted Trans Pacific Partnership (TPP) and how to build on it towards even more ambitious regional frameworks for trade and investment.

But history didn’t work out that way.

President Trump has taken the United States out of TPP and is challenging the model of past American leadership in the global economy, and with that also calling into question long-held principles and practices of economic co-operation and integration.

President Xi in China is emerging as the new champion of globalisation at a time when many around the world are concerned about how its benefits are shared and its challenges managed.

To coin a phrase which comes from another time of global challenge in the 30s and 40s, who would have thunk it !

I do not want to be too definitive about the policy choices that we all might have to make in the light of these profound – some might even say, existential – developments.

But it is not too early to start thinking about what the world might look like in the next few years and how we can best respond. So today I’d like to explore with you:

  • where the process of economic integration has led us thus far;
  • what the current challenges are facing this process, and what future opportunities it might offer
  • what might be the immediate options now before us.

Let me start however, before we get into the big picture, by talking for a few moments about trade in services, and how all of this might relate to you as services providers.

Trade in services

When most people talk about trade, they are generally thinking about goods crossing borders.

In fact, the services sector is not only central to most economies’ GDP and world economic output, but is also an increasingly important element of global trade.

This is due in part to the process of globalisation, but also thanks to changes in technology and regulation that have allowed services that were not previously viewed as being “tradable” to cross borders.

Measured in value-added terms, about half of world trade is made up of trade in commercial services – more than manufacturing or agriculture alone.[1]

The value of this trade has more than quadrupled in the last 25 years, growing from USD$1.2 trillion in 1995 to USD$4.9 trillion in 2014.[2]

That figure would be higher still if you also counted the contribution of services provided through ‘commercial presence’ in offshore investments, along with intermediate services inputs that are “embodied” in goods (such as the software used to run a piece of machinery, or the legal services involved in the manufacturing process).

Services also provide the backbone of the infrastructure for goods trade – I am thinking of examples such as transport, logistics, distribution, wholesale and retail services, telecommunications and ICT, as well as the professional services of which of course legal services are foremost, along with financial services, which all enable trade to take place.

Services also add value to goods exports through so-called “embedded services”, where linked elements like technical support, after-sales service or financing are part of the goods package.

In other words, services are a core component of a new model for business and trade, even for goods, that was first evident in East Asia but which is now coming to dominate all of world trade – so-called “global value chains”.

A GVC world

In this new business model, production is fragmented across markets.

Manufacturing and services are combined in stages across many markets before delivery to the final consumer. Without services facilitating and enabling global value chains, goods could not cross borders as easily or efficiently, and quite simply, value could not be added along the chain.

Professor Peter Petri and colleagues, in a report to ABAC in 2015, captured this well when he said:

“Businesses (today) engage in more varied activities, with a wider range of partners, and in more markets than ever. Major technological and economic trends are disrupting the business environment, including the emergence of global value chains, the digital/Internet revolution, the rise of a giant middle class, and dramatic improvements in connectivity.[3]

What does all of this have to do with the TPP, or a post-TPP trade agenda?

In fact, it is central.

One of the much-repeated criticisms of the Trans Pacific Partnership (TPP) was that it was not a trade agreement at all.

This is a rather facile argument.

Of course TPP was a trade agreement – the larger part of its 5,000 pages are taken up by complex sechedules outlining the process for the elimination of tariffs.

But, as I’ve just explained, there’s a much bigger picture here and it’s really not that complicated – trade is not trade anymore.

Trade has been replaced by a set of much more complex economic interactions between firms and whole economies.

And services are the heart of that new model.

Many of the objections to TPP overlook the fact that the business model in the region has changed.

It was precisely to try to find new ways of incentivising and enhancing access into these Asia-Pacific global value chains that TPP was conceived.

In that sense TPP represented an effort for the regional framework of rules for trade (including services trade) and investment to catch up with the action – even if in the end it was a very long and tortuous process.

Hence the need for the agreement to cover not just tariffs but non-tariff barriers, not just goods but services, not just trade but investment, not just border measures but behind the border measures, not simply regulatory harmonisation, but processes for regulatory coherence and convergence, not “one size fits all” but “one fit for all sizes”.

Put simply, TPP was trying, in all its insufficiency, to reflect the new reality of the way business is done in the region and beyond.

That was a particularly important goal in respect of services trade.

Global architecture for services trade

The global ‘architecture’ for services trade is relatively under-developed.

The last major multilateral trade negotiation, the WTO Uruguay Round, brought services into the world framework of rules for trade for the first time, with the General Agreement on Trade in Services, or GATS.

But the GATS was a fairly timid agreement.

Although it established some critical basic structures and definitions for services trade, it mostly did not do much more than simply setting down the existing terms of regulation in a given market, without any real opening up of services markets.

Since then, the new frontier for liberalising services trade has been through bilateral and plurilateral FTAs.[4]

TPP was at the forefront of this process.

TPP economies account for around one-quarter of the world’s trade in services, and are enthusiastic participants in global value chains.

TPP would have taken important strides in pushing services trade well beyond the WTO GATS agreement.

The TPP would have opened up some important markets and modes of supply, including in the growing digital sphere, and provided for greater transparency and certainty for services suppliers within the TPP zone.

It was also future-proofed in the sense of automatically incorporating most future services sector regulatory reforms into the agreement.

The way that the outcomes were structured – on a “negative list” basis, to use the technical jargon – would have meant that markets for new services were automatically open, unless countries had made reservations against those specific sectors.

And the TPP also contained important provisions on regulatory cooperation in professional services, such as licensing, certification of professional services suppliers and mutual recognition agreements on qualifications and best practice regulation.

Economic modelling of the impacts of TPP put the benefits from reducing regulatory barriers to services trade for the US in the order of USD$35 billion, nearly USD$40 billion for Japan, around USD$10 billion for Malaysia and Canada – and even benefits in the order of USD$18 billion for the EU, which of course was not a party to the TPP.[5]

Challenges to the existing order

 President Trump’s decision to leave TPP even before it entered into effect has clearly put paid to much of this grand strategy – at least for the time being.

While it is still early days in the new Administration and its trade team is not yet fully in place, there is talk about a re-thinking of American leadership on trade.

In a recent memo the respected head of the American think-tank CSIS, John Hamre, writes that we are back in 1949 – a time when President Truman faced an existential choice about whether to concentrate on domestic growth and competitiveness at the expense of global recovery.

Hamre writes – we are back to the great challenge that faced President Truman. Will America shake off its deep- seated desire to pull back and nurse its bruises, or will it champion an international order designed to create a broad environment where human potential can blossom?[6]

It was after all American leadership, which imposed a benign order on the region after the conflict of the last century.

It was this leadership which helped secure the emergence of the World Trade Organisation as the repository of trade law and a framework for settling disputes.

It is this leadership, which has in more recent times, trialled new arrangements for trade liberalisation through NAFTA and a range of other agreements, and helped shape the new business model we see today in the region.

This is not to say that the existing order is either perfect or sufficient – clearly it was not.

In the economic space that order has come under intense criticism.

There has been criticism for failing to take sufficient account of environmental and sustainability issues.

There has been a perceived failure to ensure that those who are disadvantaged from the adjustment brought about by changing patterns of production and trade are appropriately cared for and helped into new areas of enterprise.

And there is the criticism that economic integration has served to advance ithe interests of multinational corporations especially through measures aimed at stimulating and protecting investment or through the rules being devised for the digitial economy.

“Making globalisation work for people” is not just a slogan – it has become a policy imperative in the age of Brexit and Trump and Le Pen.

In 2017 we face not only the prospect of new direction from the United States on trade, we face new challenges from within about the nature of the very order that has served us well in the past.

 What should we do in this “post-TPP world”?

In this context, what is to be done by those who continue to see value in economic integration and are looking for ways to boost trade and investment?

It would be a calamity for the global economy if economies were to retreat into economic nationalism and protectionsm.

Nor should the post-TPP world involve a futile attempt to keep away from the controversial aspects of TPP and seek instead to negotiate more limited “market access only deals” – this simply denies the reality of value chains.

Here in New Zealand in recent weeks the Government has released its Trade Agenda 2030.

Trade Agenda 2030 commits the Government to:

  • seeking advantage for New Zealand through a goal of FTAs covering 90 percent of goods trade
  • being more debliberate about tackling non tariff barriers as tariffs decline over time
  • focusing more on services, investment and digital trade to reflect new growth opportunities
  • having secured better market access doing more to help exporters succeed in overseas markets.

Underpinning all this, the Government intends to create more opportunities for people to engage on trade issues important to them – this is a direct reponse to the need to respond to new public concern about globalisation.

In fact this is not just a job for the Government but for business as well, particularly as we enter a more complex and uncertain period.

Agenda 2030 underlines that the “post-TPP world” is likely going to be a mix of things, both in the Asia Pacific region and beyond.

It’s not just New Zealand that is thinking creatively about new bilateral FTAs, both within our region and across the globe.

The EU is already asserting its interest in deepening relationships in the Asia Pacific – not just with New Zealand and Australia, where good progress in launching negotiations is being made, but also with Japan and others.

Whether or not it can make progress bilaterally with the US, through TTIP, of course remains a moot point.

In years to come we will have to factor in the advent of “global Britain” into the equation even if it will have its hands full with Brexit for some years.

China is also driving ahead with new initiatives like “Belt and Road”, which we need to examine more deeply but which clearly holds huge potential not just for infrastructure development but for greater connectivity.

And New Zealand and China have recently also announced that we are seeking to upgrade our bilateral FTA, which entered into force in 2008.

Beyond bilaterals, we certainly need to continue to seek high quality plurilateral agreements.

TPP was always designed to lead to something much larger, an APEC-wide grouping gathered together in the Free Trade Area of the Asia Pacific (FTAAP).

But TPP was never the only such pathway.

In Asia there is the Regional Comprehensive Economic Partnership (RCEP).

It is important to stress that RCEP is not the forum in which China, as our Amerian friends would have it, “is writing the rules for the region”.

RCEP is led by ASEAN, not China, and while on paper seeks an ambitious outcome, is proving difficult to conclude.

RCEP is not TPP, but now more than ever we should continue to push for an ambitious and comprehensive agreement.

And, thinking even bigger, China remains very interested in the concept of the Free Trade Area of the Asia Pacific (FTAAP), the pathways to which appear to be as elusive as ever but which remains an important goal for APEC.

Child of TPP

And what of the TPP itself?

There is still the prospect of a TPP-like agreement amongst the remaining 11 members.

Australia, New Zealand and Singapore have expressed interest in exploring the options and Mexico has signalled that it wishes to explore bilateral agreements with the remaining members.

While Japan, a key player, earlier said TPP was “meaningless” without the United States, Japan was represented at the recent Ministerial gathering in Chile which discussed the future of the agreement.

I think this Japanese reticence is understandable and needs to be seen in the context of their critical security relationship with the United States.

On the other hand, Japan, like New Zealand, has already ratified TPP.

We need to let some quiet diplomacy proceed to see if the remaining 11 parties, or a sub-set of them, see merit in amending TPP to take account of US withdrawal.

This should include deciding whether or not to strip out of the agreement those things that were essentially US demands.

For New Zealand, TPP (11) would not deliver the long sought after FTA with the United States.

America is not just a major trade and investment partner for New Zealand – it is a powerhouse of innovation, entrepreneurship and business ideas.

New Zealand, like other countries, now has to find a way to engage and work constructively with the new Administration, even as we look to advance other options for growing and future-proofing our economy.

Return to Geneva?

Beyond these bilateral FTA prospects, talk still continues in Geneva.

A small group of particularly ambitious countries, including New Zealand, has also been engaged in negotiating a sectoral Trade in Services Agreement, or TiSA.

Although involving only 23 WTO Members (counting the EU as a single Member), the negotiations are viewed as a building block towards a broader WTO agreement someday.

The talks were close to conclusion by the end of last year – with the ambitious position taken by some participants reportedly reflecting the GATS-plus outcomes in TPP – but the US position still remains in limbo.

It is not clear whether the Trump Administration will want to bring TiSA to conclusion.

There are also sensitivities for the Europeans over certain elements, particularly relating to cross-border data flows and privacy issues, which mean that the process is effectively on hold until later in the year.

More broadly, the WTO is scheduled to hold its Ministerial meeting in Buenos Aires at the end of the year – whether some further progress can be made on services trade or multilateral trade rules more generally remains to be seen.

As ever, hope springs eternal with trade negotiations especially in the WTO!

Conclusion

Who would have thunk it?

TPP may have suffered a potentially fatal setback, but the process of economic integration, driven by globalisation and commercial impetus, has not stopped.

The ideas which gave rise to TPP are still very much with us and on the minds of policy makers and business leaders around the world.

The big question today is what sort of economic integration are we going to see in the future and what will be the rule-making that shapes it.

There are options for moving forward, with or without the United States, although the precise way may not yet be clear.

What is clear is that the services sector is going to continue to play an important role which will require fresh thinking from governments and stakeholders, together with peseverence and commitment, as we continue to trade in an uncertain world.

 

[1] Speech by WTO DG Azevedo, January 2017. For NZ, services account for around two-thirds of GDP, 70 percent of employment and around one-third of our exports, amounting to around NZD$21.5 billion last year (Statistics New Zealand, Global New Zealand YE June 2016).

[2] http://www.efta.int/free-trade/free-trade-agreements/trade-in-services

[3] Peter A Petri et al: “The FTAAP Opportunity – a report to ABAC”, October 2015 – https://www2.abaconline.org/assets/2015/4%20Manila/FTAAP%20OPPORTUNITY%20(1).pdf accessed 1 February 2015

[4] WTO (Martin Roy), ‘Services Commitments in Preferential Trade Agreements: An Expanded Dataset’, WTO Staff Working Paper ERSD-2011-18, 9 November 2011. “Overall … on average, commitments undertaken in PTAs far outweigh those contained in GATS schedules, but also those offered in the current Round of negotiations….although, naturally, the level of GATS+ commitments varies significantly across Members”.

[5] Professor Peter Petri,’The Economic Effects of the Trans-Pacific Partnership: New Estimates’, PIIE Working Paper Series, January 2016, pg 24

[6] John Hamre; “Memorandum to CSIS Trustees, Advisers and Friends”, 1 February 2017

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